Metals Madness: Palladium Prices Soar as Gold Meanders

Analysts explain the factors driving the divergent performance of these commodities and their associated ETFs

Market volatility and global instability are often good for gold, as investors seek a safe haven.

In July, for instance, gold exchange-traded funds saw their largest inflows since November 2012, rising by nearly 484,000 ounces, according to a report published by ETF Securities on Monday.

But the momentum behind that metal is nothing compared to the positive gains of palladium.

Palladium futures have been trading at about $895 per ounce, a level they haven’t seen since early 2001.

The reason? Traders fears that sanctions could limit the export of this commodity — which is used for major car parts and hydraulic fracturing for natural gas — from Russia. In fact, some traders predict that the metal could rise to $1,000 an ounce.

Meanwhile, gold prices are up only about 5% this year.

For investors — who may own the ETFS Physical Palladium Shares ETF (PALL) — the metal is up 22% this year, and earlier this week, it made 13-year highs as it broke above $900 per troy ounce. Gold, meanwhile, is only up 5% in 2014.

The SPDR Gold Trust ETF (GLD), for instance, has risen roughly 6% year to date. That puts it behind the S&P 500 ETF Trust (SPY), which has improved about 7%.

“Relative to gold, [palladium’s] obviously outperformed quite significantly,” said Steven Pytlar, chief equity strategist at Prime Executions, told CNBC on Thursday. “There does appear to be more upside, at least according to the charts, on the long-term timeframe.”

“Depletion of the Russian inventory has been a big issue,” explained David Seaburg, head of equity sales trading at Cowen &  Co., on the same program.

The price of palladium is rising due to increasing auto sales in China and the United States, which depend on it for the production of catalytic converters.

Supplies of the metal, also, are "very constrained," according to Mike McGlone, ETF Securities' U.S. director of research. Strikes earlier this year on South Africa caused a shock to production, he adds.

Global Dynamics

On the flipside, the physical demand for gold is falling.

The World Gold Council’s second-quarter report points to the fact that the surge in gold demand of 2013 is no more.

Gold jewelry fabrication, for instance, is down nearly 30% year over year to 518 ton. The demand for bars and coins declined about 55% in Q2’14 vs. last year.

“In the near term, we believe investor flows — both in the futures market and ETP market — will be the main driver of the gold price, with perceptions of real interest rate trends and geopolitical risks playing the dominant role,” McGlone wrote in a report released on Monday.

“On this basis, we believe the gold price will continue to trade in a relatively narrow range in the near term, barring a significant global macro or political shock,” he noted.

Other factors limiting gold’s upside at present are the perception that inflation is not a concern and the rising strength of the U.S. dollar.

Oil prices, for instance, are at a one-year low. In addition, concerns that Russian geopolitical tensions would drive up energy prices have subsided. 

Meanwhile, gold miners have improved their performance and are outperforming both the metal and palladium.

The Market Vectors Gold Miners ETF (GDX), for instance, is up 33% year to date. And the Market Vectors Junior Gold Miners ETF (GDXJ) has improved 24%.

In the last month, though, these two ETFs have moved into negative territory, as palladium has risen. 

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Check out Axel Merk: Time to Take ‘Chips Off the Table’ on ThinkAdvisor.

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